Beware Excessively Chipper CEOs
The economist John Maynard Keynes wrote of the “animal spirits” that can affect the stock market and the economy, and economists routinely monitor consumer and investor sentiment for clues about where the business cycle and markets are heading. A new study highlights another measure of mood: manager sentiment.
Drawing on transcripts of quarterly conference calls with investors and management discussions in 10-K and 10-Q filings—more than 375,000 documents in all—researchers used textual analysis tools to count the positive and negative words in all statements for each month from January 2003 to December 2014. They calculated the difference between the two types of words and divided by the total number of words to arrive at a “monthly financial statement tone.” Next they examined aggregate stock returns for the subsequent month, three months, six months, nine months, and 12 months. The more positive corporate managers were in their communications, the worse the market performed. Comparing their indicator with others, such as the consumer sentiment measures produced by the University of Michigan and the Conference Board, the researchers found that manager sentiment was a better predictor of stock price movements.
The researchers believe that high degrees of positivity signal that managers are overconfident and apt to overinvest, causing profits to decline. “Corporate managers as a whole tend to be overly optimistic when the economy and the market peak, and the manager sentiment index is a contrarian return indicator,” they write.
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